How to build your credit- Importance, Tips

An individual’s credit has a big impact on his/her financial life. More and more banks and financial institutions in India have started focusing on the credit standing of applicants before extending fresh credit. Those who maintain good credit will find it easier to get loans and credit cards at lower interest rates, more credit card rewards and other benefits.

No credit or poor credit could mean difficulty in getting a credit card, borrowing a loan at a lower interest rate, etc. Without good credit standing, lenders see non-reliability on the borrower to repay credit/loans. This is why it is important to build credit at the earliest. 

Building credit isn’t as hard as one might think. With various easy ways to build credit these days, one can easily work towards improving credit history and increasing their credit score.

Here, we will share some important factors that can aid an individual to build credit. First, let’s understand why building credit is important.

Why you should establish credit?

Those who have been paying for all your needs using cash and never used credit, it’s time to start now. Also, those who have had credit problems in the past must ensure to re-establish good credit for these reasons:

• Good credit is crucial in securing finance while buying a house, car, or other big-ticket purchases that require loan borrowing.
• Some employers may also check the credit standing of prospective employees before hiring.
• Those who need a loan from banks may find it easier to get one with a good credit history.

How does credit card help in building credit

To start building credit, one can opt for a credit card. As one uses a credit card for various purchases, the credit history starts getting recorded. Credit cards can be used for:

• Making online purchases, 
• Making travel reservations, 
• Renting cars, 
• Larger purchases that can be paid through instalments,
• Emergency financial needs

While using a credit card, it is important to maintain financial discipline for building a positive credit track record. Here is how one can make effective use of credit cards to build credit:

1. Pay on time – After making purchases using a credit card, one must make sure to pay the credit card bill on time. This demonstrates responsibility on the credit user’s part and his/her ability to handle debt appropriately. Adhering to re-payment schedules gives a boost to one’s credit history and even helps in making a quick recovery after a low credit standing. Many people tend to avoid using credit cards. However, it makes sense to make good use of it and repay it on time and in full to ensure a positive credit track record.
   
2. Judicious use of credit card – Many individuals may borrow multiple credit cards and use them for making all purchases. However, over-utilisation of credit cards and exhausting credit limit every month may hamper one’s credit standing as it shows that the user is desperate for credit.
   
3. Track payment history – One’s credit card payment track record should not have late payments since it has a direct impact on credit standing. An ideal way to go about timely repayments is to set automatic payments for credit card bills so that one does not miss any payments.

Tips to effectively manage credit history

Credit should not just be established but it should also be maintained and managed effectively. Some tips that one can follow are:

• Use credit cards for purchases but never use beyond the available credit limit 
• Pay minimum balance due every month or full payment, depending on financial standing
• The faster the credit repayment, the better the chances of availing fresh credit

Conclusion

Keeping an emergency fund at all times can also help in keeping credit card spending within a limit. Overusing credit cards will not help in building credit but it may lead to a debt trap in the future. One must also ensure to keep old credit cards open as the longer the credit history, the better the credit rating. 

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